**FILE**In this Oct. 18, 2007 file photo of Microsoft CEO Steve Ballmer gestures as he talks at the Web 2.0 Summit in San Francisco. Microsoft Corp. withdrew its $42.3 billion bid to buy Yahoo Inc. on Saturday, scrapping an attempt to snap up the tarnished Internet icon in hopes of toppling online search and advertising leader Google Inc. The decision to walk away from the deal came after last-ditch efforts to negotiate a mutually acceptable sale price proved unsuccessful. The talks reached a breaking point after Jerry Yang and David Filo, the co-founders of Sunnyvale-based Yahoo, flew to Seattle in the morning to meet personally with Ballmer. (AP Photo/Paul Sakuma) less

**FILE**In this Oct. 18, 2007 file photo of Microsoft CEO Steve Ballmer gestures as he talks at the Web 2.0 Summit in San Francisco. Microsoft Corp. withdrew its $42.3 billion bid to buy Yahoo Inc. on Saturday, ... more

Photo: Paul Sakuma

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Microsoft abandons bid for Yahoo. Associated Press Graphic

Microsoft abandons bid for Yahoo. Associated Press Graphic

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Pressure's now on Yahoo CEO

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Yahoo Chief Executive Officer Jerry Yang is under intense pressure now that Microsoft Corp. has withdrawn its megamerger proposal for the Sunnyvale Web portal.

Shareholders who supported the takeover no doubt want his head. The only way to try to make them happy is to lead a massive overhaul of his company.

If successful, Yang will go down as a business genius who resurrected his pioneering Web site against steep odds. If not, the company he helped create will continue to founder and perhaps face another takeover bid by Microsoft, with far less chance of avoiding its clutches.

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"Yahoo is very weak," said George Hoyem, managing director of Blueprint Ventures, a venture capital firm. "Google is continuing to dominate the business, and unless Yahoo really executes well, which they haven't so far, they're in a lot of trouble."

Microsoft, the Redmond, Wash., softwaremaker, pulled its high-profile takeover offer for Yahoo on Saturday, putting a stunning close to the three-month merger drama between the two technology giants. In the end, the two sides couldn't agree on a price.

In the final days of negotiations, Microsoft had sweetened its bid to $47.5 billion, or $33 per share, up from its original proposal of $44.6 billion, or $31 per share. But Yahoo wanted at least $53 billion, or $37 per share.

Now that the offer is withdrawn, Yahoo has to make itself more viable as an independent company. Although profitable, Yahoo has stumbled in the lucrative search business - in which its market share has been slowly eroded by Google Inc. - and largely missed out on the social networking phenomenon that has made household names out of MySpace and Facebook.

Most immediately, Yahoo faces the prospect of its shares, which closed Friday at $28.67, tanking after the stock market opens today. Microsoft's proposal propped up the slumping stock by putting a 70 percent premium on them.

No one expects them to tumble to $19.18, where they were trading just before the merger dance began Jan. 31. But many analysts expect the shares to fall to between $20 and $25, wiping out billions of dollars from Yahoo's market value.

Count on a quick onslaught of lawsuits accusing Yahoo's board of failing to act in shareholder interest by rebuffing Microsoft's blockbuster offer. Big shareholders also will pressure Yahoo's board to boost the stock to equal or higher than the Microsoft offer, a subject that will no doubt come up at the company's annual meeting, which is yet unscheduled, but likely sometime this summer.

In response to Microsoft withdrawing its bid, Yahoo's management voiced optimism that they will be able to engineer a turnaround. Its plan calls for, among other things, making Yahoo a must-buy for advertisers, cutting costs and focusing on promising products while jettisoning those that are underperforming.

"With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users," Yang said in a statement.

Some of the medicine Yahoo is considering is drastic. One option under discussion is for Yahoo to outsource its search advertising to Google, which would help generate up to $1 billion annually in additional cash flow, by one analyst's estimate.

Yahoo's current search advertising system, Panama, lags far behind Google in terms of generating revenue. By Yahoo's own estimate, it makes up to 70 percent less money per query on average than Google.

In terms of U.S. market share, Yahoo's properties account for 21.3 percent of all searches, versus 59.8 percent for Google, according to comScore Inc. Although a strong No. 2, Yahoo's share of the market has been steadily eroding.

In any case, the top search engines teaming up raises serious antitrust concerns, and Microsoft and consumer interest groups likely will push regulators to take a close look. To address those worries, Yahoo and Google are debating whether to create a system in which other companies - including Microsoft - would compete to place ads on Yahoo based on whose ads would provide the most revenue.

Separate talks are ongoing with Time Warner Inc. about its AOL unit, and News Corp., which owns MySpace. As part of the deals under discussion, Yahoo would take control of their Internet assets, plus get an infusion of cash, in exchange for giving up around 20 percent of the company.

The greater heft would give Yahoo a better foothold in display advertising, the equivalent of online billboards. Yahoo is already the leader in this area and hopes to build on it.

Still, many are skeptical that Yang can pull off a turnaround, which depends on restoring its luster in both online advertising and building products that attract legions of users.

"I don't see a positive path for Yahoo on its own," Keith Benjamin, a venture capitalist with Levensohn Venture Partners, said in an e-mail. "It is destined to be less and less popular. Why would anybody use Yahoo versus better alternatives?"